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Strategic sourcing analysis: how to get started

Authored by Melanie Varghese

The COVID-19 pandemic is placing significant financial strain on public sector organizations. It is critical during this time to consider opportunities to reduce costs. Strategic sourcing is a tool that many governmental entities have yet to implement but could significantly reduce the procurement of goods and services, including time savings for contract administration. 

Strategic sourcing – what is it and how can you utilize it to improve operations of a public sector entity?

Strategic sourcing analysis is a collaborative and organized approach to leveraging suppliers and organizational strategy to yield long-term cost-saving benefits. It is the process by which entities work collaboratively with internal stakeholders and suppliers to align objectives with the purchasing priorities of the organization.

When you follow a strategic sourcing approach, you are essentially looking at the big picture to identify ways you can add more long-term value to the organization at the same or lower cost. This approach is in contrast to the common tactical sourcing approach, which is more reactive in nature and focuses on identifying quick and easy ways to immediately reduce spend.  Instead, with strategic sourcing, the focus is on building sustainable, collaborative relationships with suppliers and other value partners in order to achieve long-term cost saving results. Unfortunately, many governments operate using the tactical approach.

It is important to assess whether the benefits of strategic sourcing are right for your organization. There are various advantages to leveraging this approach, including:

  • Better alignment of spending with strategy and organizational objectives
  • Sustainable relationships with suppliers built with trust
  • Increased long-term savings and streamlined business processes

Listed below are four simple steps to begin the process of implementing strategic sourcing within your organization:

Step 1: Conduct research

Start with researching your organization’s current sourcing methods and identify areas for improvement. Management should assess strategy for the next three to five years to determine the organization’s spending priorities and how they will be affected by the market in the next few years. Part of this step also includes looking internally at the organization’s processes to determine if procurement policies need to be adjusted to effectively implement a new sourcing approach within the organization.

Step 2: Develop a sourcing team

To be successful with strategic sourcing, it is crucial to develop a strong team of individuals with specific skillsets focused on market research, finance, accounting, operations, procurement and communications. One of the main benefits of this approach involves developing strong and collaborative relationships, which means individuals with expertise in these areas can add value to relationships with suppliers.

Step 3:  Align strategy with the organization’s goals and objectives

Now that a skilled team has been formed, it is important for the goals and objectives of the organization to be aligned with the future spending strategy. This involves identifying organizational requirements and determining metrics to measure success. Building a communication workflow to ensure all stakeholders are part of the communication path is essential in effectively implementing this approach within an organization.

Step 4: Select suppliers and implement management approach

The final step in beginning this process is to conduct an in-depth analysis of spending data for commonly purchased goods and services, review the existing supplier profiles and develop new contracts to secure better prices. It is important to clearly communicate expectations and requirements as well as goals to determine if the suppliers are able to deliver on the long-term objectives of the organization. Once suppliers are selected, implementing a management approach is a key step in allowing for two-way consistent and regular communication between the organization and the suppliers. Best-in-class entities develop a means of analyzing vendor performance as well.

A simple example

A large municipal government has a policy in place that enables department directors to make purchases of up to $10,000 without obtaining competitive quotes. The sourcing function conducts an analysis and determines that department managers are making numerous office supplies purchases from a variety of stores. A strategic sourcing opportunity could be to competitively solicit and establish a master agreement for office supplies and establish a rule that department directors leverage that contract to take advantage of the pricing.

In summary

Organizations that choose to leverage strategic sourcing can establish a proactive and streamlined approach to sourcing. By aligning the organization’s goals with the sourcing strategy, your organization can gain a competitive edge and optimize its performance and long-term savings.

For more information on this topic, or learn how Baker Tilly public sector specialists can help, contact our team.

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